Speaking the same tongue

New version of Rosetta Stone software to create global language communities

Language-learning innovator Rosetta Stone is giving its users the opportunity to use their Spanish, Chinese or Russian without leaving their homes.

In the third quarter, the Arlington-based company will launch the next generation of its software packages offered in 31 global languages — Version 4 TOTALe. The new version will integrate Rosetta Stone’s global online community for its users, providing online access to native language coaches, competitive games and the ability to communicate with Rosetta Stone learners worldwide.

Rosetta Stone’s programs use technology to mimic the natural way of learning. So the entire program is taught in the language — never translated. That means that the same products can be sold internationally — and people tend to spend more on language learning than Americans.

Virginia Business’ Special Projects Editor Jessica Sabbath sat down with Rosetta Stone CEO Tom Adams to discuss Version 4 TOTALe, the ups and downs following the company’s IPO, international growth opportunities and its gutsy lawsuit against online giant Google Inc. (For the record: Adams speaks French, Swedish, English and Spanish fluently; knows some German, and has used Rosetta Stone software to learn Chinese and some Russian.)

Virginia Business: How many languages do you speak, and how many have you learned using Rosetta Stone?

Tom Adams: The simple answer is I speak Swedish, French, English, Spanish the way I’m speaking to you in English. So it’s conversational, fluent, I can read any text…that kind of thing. With German, I actually learned that in the traditional method and I’ve spent some time in Germany now so it’s better, but it’s sort of weak. I can survive. You can drop me in Germany and I will be fine.

Chinese I actually learned using Rosetta Stone before I worked for the company. I lived in China. I had a friend who worked for Rosetta Stone, Fairfield Language Technologies, as it was known back then. This is the late 90s. This is an early product. I think if we saw it today we’d call it a prototype, but back then it was a product. So I used it while I lived in China and found it very helpful. Obviously being immersed in the country is extremely helpful because you get to use the language. Since I joined Rosetta Stone I’ve been trying to learn Russian. But things get in the way. So I’ve done probably about 35, 40 hours of study in Russian. I speak a little bit of Russian as a result.

But I think what’s so exciting about Rosetta Stone is with the new solution we’re rolling out next quarter, we’re not just going to have you learn the language, but you’re going to be using it. You’re going to be speaking for an hour, only in the language, every now and then. So, on a regular basis you’re going into these studio sessions.

VB: How is this Rosetta Stone Version 4 TOTALe going to be different than the current version? How is it going to be priced?

Adams: The price is going to be more or less what it is now. We are going to increase the price 5 to 15 percent depending on which product you’re talking about. So there’s a very slight pricing increase, and I say slight because in the relation to the value we’re increasing the offering, I believe the product would be worth much, much more than the current offering. The reason is that we will not just be having users learn the language on their own but they’re now practicing with coaches that are available pretty much on demand. You just click for your session and wait until it starts and bang you’re in, and you can start spending an hour.

And if you want to do that same content again, that same conversation, you can do another one. And we have people who are native speakers of the language who will only speak in that language with you. And you will understand what they say, and you will be able to say stuff to them. So it’s a fully immersive conversation environment with them online.

In addition, you’ll be able to play games with other learners. There’s two modes. Duo, when you are playing with the learner of the same language. So you and I would both be learning Russian, let’s say, and we’d both be playing a Russian game, competitively difficult. So it’s like you play Bingo but you would play Bingo, and it’s really your listening ability that drives whether you win or I win.

Then there’s Simbio, where you’re doing a more collaborative exercise with someone who’s a native speaker that is using our RWorld service which is a free online community that we have. And there’ll be a practice partner. It’s kind of like modern day pen pals except it’s voice driven and you do fun activities together. And they’ll be an exchange where you’ll do one activity that’s English to English and where the person, let’s say is Russian, lives in Moscow, and you’ll speak English to them for two to three minutes and then you’ll speak in Russian.

So I think what TOTALe Version 4 is, is a next-generation solution that takes us to a whole new level. It makes Rosetta Stone go live. You get to speak to native speakers. You come out of just being on your own doing self study. So that’s revolutionary within the industry. We’ve tested it extensively. We’ve had thousands of people use the offering and in the course of doing that we’ve been able to fine tune it so as we go live it really is the product of many, many years of development and in market testing so we’ve really worked out a lot of the kinks In addition to that I’ll say we are also offering an iPod Touch or an iPhone application that will allow you to reinforce your learning on the go.

VB: Is that something that will be sold separately?

Adams: No. Because it won’t teach. All it will do is reinforce your learning, and it’s speech-recognition that will run locally.

VB: Is the TOTALe also available for your institutional groups?

Adams: Yeah. So it’s very interesting. So we started looking at TOTALe as sort of an individual’s solution because we have lots of individual learners, and we knew that when they’re learning on their own it’s hard for them to find an opportunity to practice. Clearly, in institutional environments, very often within a school there is a Spanish-speaking teacher that can offer conversational practice. What we found is that institutions, because they are so focused on results, they want TOTALe badly, and they’ve been reaching gout to us to say, “When can we have it?” So we accelerated development for institutions. We put it towards getting it to higher education first, now corporate and government, and we’re still working on what would be an eventual K through 12 solution so we can deliver a full learning experience in a K-12 environment.

VB: International growth has been a major focus for Rosetta Stone. How are you going to continue international growth?

Adams: What we have with Rosetta Stone is a learning solution that works for anyone regardless of their native language background. And the reason is that we teach in the language you’re learning. So Chinese people and German people can learn a language with the same solution. That’s unheard of in our industry. Normally you have the Japanese product for Japanese learners of English. You have the German product for German learners of English. And what we’ve done is we’ve leveraged our platform on a global basis. We’ve opened offices in Seoul, in Tokyo, in London and Germany. We have four initial markets. If you add up just how much those four markets spend and you add up the population, they’re about the size of the U.S. population, they’re actually spending 3.4 times as much as the United States. So although most of our sales are in the U.S., we are seeing incredible growth in those markets, which are much larger than the market where we’ve had all our growth up until the end of last year.

Now, the international growth is what’s the biggest driver for us. Clearly to address the global opportunities we need to enter new markets. We’re looking at large emerging markets, Brazil for example, and largely established markets like Italy where they spend almost as much money as all the U.S. on language training. So there’s a lot of opportunity in entering new markets. But I think more importantly there’s an opportunity for us to become much bigger players in each of those markets.

So I think if we just enter another five markets we would then be in 10 countries addressing a market size about 10 times the U.S. market is for us. In the U.S. last year we did over $200 million dollars so you can imagine that’s enormous growth potential for the company. When you go into a new market with an offering like Rosetta Stone it’s very important for us to explain how it’s different from what they’re familiar with. Most people believe with tapes or CDs or that they’ve gotta get some of those Rosetta Stone books. We’re not. We’re completely different. We’re the next generation technology. We leverage online capabilities providing native speakers. We have interactive technologies, speech-recognition technologies and it’s hard for people to understand how that would be applied to language training until we do a demonstration. So when we go into new markets our first step is to open kiosks and to start advertising. That gets people to call to get a demo because once they get the demo then they’re able to experience something completely different.

VB: How have the ups and downs been since the IPO last year? What are the benefits for the company and were there any surprises?

Adams: So I think the benefit for us was that one I think it’s a great branding event it really puts you out there as a company that has reached a certain level of performance and size. And that helps us with institutional clients, so we’ve done a lot of very large contracts since that time. Actually, on a global basis, somehow many people have heard about us as the result of a successful IPO. Also, we’ve been able to put the company in a phenomenal financial position. We have about $100 million in cash. We have zero debt, so we’re a business that can go through ups and downs. At the same time we’ve managed to make the business even more cash-flow generating so our operating cash flows have been growing at a very fast clip. I think in the last 12 months we’ve been generating $3 or $4 million of operating cash flow which is very significant. So business is doing well. We’ve positioned the company even more prominently as the leader in its industry.

Last year we did sort of have the hiccups of disappointing outside investors with having to restate our guidance for the third quarter. When we did that, obviously as a new young company, you take a hit to your credibility. But at the same time we did it after we had the results of the first month of the quarter. We very quickly took the right step of saying, “Something went wrong in the first month of the third quarter and we no longer believe we’re going to achieve the goal.” We actually missed only the initial guidance that we had given by 4 cents, which is about $800,000. This is on a business that generates $44 million in cash flow so it’s not a big miss versus what we had originally said. But still, people expect perfect execution in your first 12 months and we didn’t deliver it because of that.

We’re public, but like many other large successful companies, Amazon, for example, we have a bigger cause. We’re trying to change how people learn languages. We’re trying to make it much easier for people to learn a new language so they can do things they couldn’t do before. And we believe that if we continue to innovate and develop towards that bigger goal, and we execute well commercially towards that, our shareholders will do very well. And so as a business I think we are much more positioned as a long-term investment opportunity, and I think that is something that has not changed since we went public.

VB: Does the company plan to appeal the court’s decision from the Google lawsuit and in general how much of a threat is piracy and copyright infringement to Rosetta Stone?

Adams: Good question. I can’t answer that much about it. What happened was the court made a ruling. It did not issue a memorandum giving its reasons for the ruling. It was very funny, not so funny I guess, but right after the ruling the level of piracy and infringement went up. During the two weeks before the trial it had been reduced and it went in a massive way and was very damaging for our company. As you can imagine, in this day and age, the future of America depends on our ability to protect our intellectual property. Simply put, America does not have the best public education system in the world anymore. America does not have unique access to capital. The capital markets are global. And you have a higher cost base because people have higher salaries here.

So the only thing we can rely on is our ability to be more innovative and our ability to protect that innovation. What we’ve been subjected to on websites, on search engines like Google, is criminals who buy placement and pay Google money for that placement on our search term. They build websites that look like our websites and they confuse customers on a systematic basis. And it enriches Google. And that is something that’s very disagreeable to us. So we’re waiting for a memorandum from the court, but I don’t think in America we want a system whereby someone from the safety of China can steal intellectual property developed in America using American labor and American talent and vision, and then for them to be able to transact from the safety of being in China.

That is the road to ruin in my opinion for not just Rosetta Stone but for the entire system here. And this issue obviously relates to software by the way you’ve seen real challenges in the entertainment industry where many people have lost their jobs because companies cannot pay for the value of the work product. And I think as a society we need to have a legal system that protects our intellectual property.